Traditionally, the insurance market cycle follows a 7-10 year trend.
To help simplify and explain this process… When premiums increase to a stage where insurers receive strong profits, this leads to new competitors entering the insurance market. This increased competition drives the cost of insurance down, then once the insurer loss ratios increase, so do their premiums, leading to a hardening cycle.
Each insurance market cycle has different factors that contribute, which we will discuss further. The worrying part of this current cycle is that the end is unknown.
Premiums are high, why aren’t we seeing increased competition?
Although premiums are high, insurance companies’ profits are low, leading to a decrease in new competitors entering the market. There are two main reasons why insurer profits are low:
- Poor return on investments through low interest rates, lower returns in equities and other indirect investments.
- High loss ratios due to claims, not only seen with property claims and rising material costs, but also social inflation through increased litigation and class actions.
In Australia, almost all types of insurance are suffering higher than ever loss ratios. For a new insurer to enter a poorly performing sector of insurance, it would be like running into a house on fire.
The world is now rich with data and statistics, leading to insurers becoming far more conservative, as they now have a stronger than ever understanding of the different risk exposures. Recent modelling also predicts an increase in natural catastrophes, causing the re-insurance market to reduce their capacity provided and pulling away from certain sectors.
What has particularly affected the Australian insurance market?
According to the Insurance Council of Australia, the insurance market has paid out more than $8.9 billion in natural disaster claims in the last three years. The Bureau of Meteorology has also recently declared a further La Nina alert, indicating another negative weather pattern this year.
Australia is also continuing to suffer its highest ever frequency and severity of Cyber-attacks. With an already very limited number of cyber insurers available, the Australian Government has now agreed to invest $10 billion into increasing our cyber protection.
Where to from here?
From a macroeconomical scale, insurance is almost becoming cost prohibitive for consumers and business owners. Hopefully, with the introduction of new insuretech to improve the overall efficiency and cost of insurance, insurers can increase their profits and start decreasing their premiums.